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Thursday, December 6, 2012

Job Recovery after the Great Recession: It's Different This Time

On the following unemployment chart, it appears that the 2008 recession was no different than earlier recessions. There is the same saw-toothed pattern on the
unemployment chart as seen in earlier recessions. But a closer look
at the data reveals some troubling issues with the recovery. It is
indeed different, this time.

In terms of job recovery and GDP growth, the “Great
Recession” of 2008 was deeper and longer than any other recession since World
War II. Recovery from the 2008 recession continues to
be weak, and is unlikely to restore either employment or GDP to pre-recession
trends before the next recession.

The rate of job recovery after recent recessions has been
weaker than following earlier recessions.
The weakness is seen clearly in three recessions since 1990, and may
indicate structural changes in the economy.
A closer look shows that the
recent weakness is part of a longer-term trend; job recovery following
recessions has been declining since World War II.

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Let’s look at some graphs.

Employment Recovery from the 2008 Recession

The most striking thing about the current recovery is that
employment has not recovered to pre-recession levels, even three and one-half
years after the official end of the recession. Another interesting observation form this
chart is the progressive change in the shape of the recovery from the 1981
recession to the 2008 recession.
Employment recovery from each successive recession is slower, as
indicated by flatter curves following the bottom of the recession.

Here is another chart showing the depth and duration of the
2008 employment recession. Job losses
and recovery are measured in percent of peak employment prior to the
recession. Recoveries from the 1990, 2001, and
current recessions are flatter and broader than following earlier recessions.

A time-series chart also shows the depth and duration of employment
recessions since 1959. Recent recessions
are broader, showing a slower recovery of jobs than after earlier recessions.

Long-term unemployment is dramatically higher than at any
time since World War II.

Not surprisingly, the quality of jobs has also deteriorated,
with higher numbers of workers accepting part-time rather than full-time
unemployment.

GDP

Persistent unemployment has
been a drag on GDP. Although GDP is now increasing at about the
same rate as before the recession, there is a gap of about $1 trillion between
actual GDP and potential GDP, as calculated by the Congressional Budget Office.

A graph presented by the
Washington Post shows the growth rates required to restore GDP to the previous
trend. At growth rates of only 2%, the
gap will not close. Bill Gross,
recognized as one of the brightest financial experts of our times, recently
stated that he expects that 2% growth and persistent unemployment are the “New
Normal” for the United States economy.
The entire WP slide show is worth seeing: http://www.washingtonpost.com/wp-srv/business/the-output-gap/index.html

Structural Change in the
Economy

We’ve seen how job recovery
after recent recessions has been weaker than following previous recessions,
indicated by flatter curves in figures 1 &2. Let’s look at another presentation of
figure 2, centering the curves on the bottom of the job recession.

All recessions prior to 1981
had full job recovery in less than 11 months; the latest three recessions have
flatter recovery profiles, and require much longer to reach full recovery. If we
calculate the rate of job recovery (slope of the positive line) from the chart
above, we see a long-term trend. The
rate of job recovery following recessions has been in a secular decline since
World War II.

This trend would seem to
indicate a progressive structural change in the economy since World War
II. Jobs which disappear during
recessions are becoming harder to replace.
The manufacturing sector, the workhorse of the American economy is
shrinking. Manufacturing jobs are
disappearing as work is outsourced overseas and American factories are increasingly
automated. New jobs are increasingly
sophisticated, and time for workers to acquire specialized training and skills,
leading to the progression we have seen in job recovery following recessions.

The Hamilton Project created
a useful interactive graphic showing the jobs growth and time required to
return the country to full employment.
The graphic allows the viewer to choose a rate of job growth, and see
the time required to recover jobs lost in the recession. Data from the most recent Dept. of Labor
shows that employment growth averaged 153,000 jobs/month in 2011, and
157,000 jobs/month so far in 2012. If
we assume a long-term trend of 155,000 jobs/month, and place this data in the
Hamilton Project calculator, we see that the jobs gap will not close before the
year 2025. I recommend trying a few scenarios on this interactive calculator (http://www.hamiltonproject.org/jobs_gap/).

The most recently reported jobs growth is 146,000, for November 2012; October jobs were revised downwards from 171,000 new jobs to 138,000 jobs. It's clear we are falling short of the 220,000 jobs needed to restore jobs lost in the recession by the year 2020.

The average interval between recessions since WWII has been
5 years, 9 months; the maximum interval between recessions was 10 years,
between 1990 and 2000. We are already 3
years and 6 months past the official end of the Great Recession. Considering the very real economic headwinds
facing the nation, It is extremely unlikely that we will restore the jobs lost
in the Great Recession before the beginning of the next recession. The job recovery following the 2008 recession
is indeed different, this time.

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References and Credits:

Charts prepared by the blogger at http://www.CalculatedRiskBlog.com were especially helpful in preparing this blog post.

Charts at these sites were also particularly useful in providing insights into the 2008 Recession recovery.:

Here’s a bit of trivia for you. There is about one ton of neodymium in every large wind turbine. Neodymium is element number 60 on the ...

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...A country gentleman, no longer young. Being retired, he has much time for books. He studies them from morn to night, and often through the night and morn again, and all he reads oppresses him; fills him with indignation at man's murderous ways toward man. He ponders the problem of how to make better a world where evil brings profit and virtue none at all; where fraud and deceit are mingled with truth and sincerity. He broods and broods and broods and broods, and finally his brains dry up. He lays down the melancholy burden of sanity...."